[Federal Register Volume 62, Number 141 (Wednesday, July 23, 1997)]
[Proposed Rules]
[Pages 39470-39477]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-19370]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 62, No. 141 / Wednesday, July 23, 1997 / 
Proposed Rules  

[[Page 39470]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1005, 1007, 1011, and 1046

[Docket No. AO-388-A9, et al.; DA-96-08]


Milk in the Carolina and Certain Other Marketing Areas; Partial 
Recommended Decision on Proposed Amendments to Marketing Agreements and 
Orders

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      7 CFR part             Marketing area             Docket No.      
------------------------------------------------------------------------
1005..................  Carolina................  AO-388-A9             
1007..................  Southeast...............  AO-366-A38            
1011..................  Tennessee Valley........  AO-251-A40            
1046..................  Louisville-Lexington-     AO-123-A67            
                         Evansville.                                    
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AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This partial recommended decision denies proposed amendments 
to 4 Federal milk orders in the Southeastern United States involving 
deductions from the minimum uniform price to producers and the 
definition of ``producer'' specified in the orders. The decision is 
based upon public hearings held May 15-16, 1996, in Charlotte, North 
Carolina, and December 17-18, 1996, in Atlanta, Georgia.

DATES: Comments are due not later than August 22, 1997.

ADDRESSES: Comments (4 copies) should be filed with the Hearing Clerk, 
Room 1083, South Building, United States Department of Agriculture, 
Washington, DC 20250.

FOR FURTHER INFORMATION CONTACT: Nicholas Memoli, Marketing Specialist, 
Order Formulation Branch, USDA/AMS/Dairy Division, Room 2971, South 
Building, P.O. Box 96456, Washington, DC 20090-6456, (Tel: 202/690-
1932; E-mail:[email protected]).

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    This recommended decision denies the proposed amendments to the 
order. In any event, the proposals were not intended to have a 
retroactive effect. Furthermore, even if adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may file with 
the Secretary a petition stating that the order, any provision of the 
order, or any obligation imposed in connection with the order is not in 
accordance with the law and request a modification of the order or to 
be exempted from the order. A handler is afforded the opportunity for a 
hearing on the petition. After a hearing, the Secretary would rule on 
the petition. The Act provides that the district court of the United 
States in any district in which the handler is an inhabitant, or has 
its principal place of business, has jurisdiction in equity to review 
the Secretary's ruling on the petition, provided a bill in equity is 
filed not later than 20 days after the date of the entry of the ruling.

Small Business Consideration

    Actions under the Federal milk order program are subject to the 
Regulatory Flexibility Act (Pub. L. 96-354, 5 U.S.C. 601-612). This Act 
seeks to ensure that, within the statutory authority of a program, the 
regulatory and informational requirements are tailored to the size and 
nature of small businesses. For the purpose of the Act, a dairy farm is 
a small business if it has an annual gross revenue of less than 
$500,000, and a dairy products manufacturer is a ``small business'' if 
it has fewer than 500 employees. For the purpose of determining which 
dairy farms are ``small businesses,'' the $500,000 per year criterion 
was used to establish a production guideline of 326,000 pounds per 
month. Although this guideline does not factor in additional monies 
that may be received by dairy producers, it should be an inclusive 
standard for most ``small'' dairy farmers. For purposes of determining 
a handler's size, if the plant is part of a larger company operating 
multiple plants that collectively exceed the 500-employee limit, the 
plant will be considered a large business even if the local plant has 
fewer than 500 employees.
    The milk of approximately 8,600 producers is pooled on the 
Carolina, Southeast, Tennessee Valley and Louisville-Lexington-
Evansville milk orders. Of these producers, 95 percent produce below 
the 326,000-pound production guideline and are considered to be small 
businesses.
    There are 43 handlers operating pool plants under the four orders. 
Of these handlers, 22 have fewer than 500 employees and qualify as 
small businesses.
    Additionally, under the Regulatory Flexibility Act the agency 
examines the impact of a proposed rule on small entities. The 
Agricultural Marketing Service has determined that neither the denial, 
nor the adoption, of this proposed rule involving deductions from the 
minimum payments to producers will have a significant economic impact 
on a substantial number of small entities under current marketing 
conditions. Dairy farmers are presently receiving the minimum order 
prices and should continue to do so given the current level of over-
order premiums now in effect. Similarly, neither adoption nor denial of 
the proposed amendments will have any effect on handlers' costs under 
the orders because handlers are voluntarily paying producer prices in 
excess of the minimum prices specified in the orders. Furthermore, for 
the long term, the issue of deductions from minimum payments will be 
considered as part of the Federal order reform in connection with the 
Federal Agriculture Improvement and Reform Act of 1996 which requires 
an examination of the Federal milk order system. The concerns of small 
businesses will be addressed throughout the review process.
    Additionally, neither the denial, nor the adoption, of the proposal 
to modify the definition of ``producer'' under the 4 orders will have a 
significant economic impact on a substantial number of small entities. 
Producer

[[Page 39471]]

pooling standards already exist in the 4 orders to assure an adequate 
association by producers in meeting the fluid milk needs of the 
markets. Also, the denial of such proposal maintains the existing 
regulatory burden, and will not place any additional responsibilities 
on handlers operating under the orders.

Prior documents in this proceeding:

    Notice of Hearing: Issued May 1, 1996; published May 3, 1996 (61 FR 
19861).
    Tentative Partial Final Decision: Issued July 12, 1996; published 
July 18, 1996 (61 FR 37628).
    Interim Amendment of Orders: Issued August 2, 1996; published 
August 9, 1996 (61 FR 41488).
    Extension of Time for Filing Comments to the Tentative Decision: 
Issued August 16, 1996; published August 23, 1996 (61 FR 43474).
    Extension of Time for Filing Comments to the Tentative Decision: 
Issued October 18, 1996; published October 25, 1996 (61 FR 55229).
    Notice of Reopened Hearing: Issued November 19, 1996; published 
November 25, 1996 (61 FR 59843).
    Partial Final Decision: Issued May 12, 1997; published May 20, 1997 
(62 FR 27525).

Preliminary Statement

    A public hearing was held to consider proposed amendments to the 
marketing agreements and the orders regulating the handling of milk in 
the aforesaid marketing areas. The hearing was held pursuant to the 
provisions of the Agricultural Marketing Agreement Act of 1937, as 
amended (7 U.S.C. 601-674), and the applicable rules of practice (7 CFR 
Part 900), in Charlotte, North Carolina, on May 15-16, 1996, and in 
Atlanta, Georgia, on December 17-18, 1996. Notice of the initial 
hearing was issued on May 1, 1996, and published May 3, 1996 (61 FR 
19861).
    An interim order amending the orders with regard to transportation 
credits was issued on August 2, 1996, and published August 9, 1996 (61 
FR 41488). The interim amendments became effective on August 10, 1996.
    The Department reopened the hearing to hear additional evidence 
regarding the transportation credit issue and also to hear a related 
``producer'' definition proposal. This hearing was held on December 17-
18, 1996, in Atlanta, Georgia, following the notice of such reopened 
hearing issued on November 19, 1996, and published on November 25, 1996 
(61 FR 59843).
    Interested parties were given until June 17, 1996, to file post-
hearing briefs regarding the deductions from the minimum price proposal 
as published in the Federal Register and as modified at the hearing. 
Regarding the additional proposal concerning the definition of a 
``producer'' heard at the reopened hearing, interested parties were 
given until February 7, 1997, to file post-hearing briefs.
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC 
20250, by the 30th day after publication of this decision in the 
Federal Register. Four copies of the exceptions should be filed. All 
written submissions made pursuant to this notice will be made available 
for public inspection at the office of the Hearing Clerk during regular 
business hours (7 CFR 1.27(b)).
    The material issues on the record of the hearing relate to:
    1. Transportation credits for supplemental bulk milk received for 
Class I use.
    2. Deductions from the minimum uniform price to producers.
    3. Whether emergency marketing conditions in the 4 regulated 
marketing areas warrant the omission of a recommended decision with 
respect to Issue No. 1 and the opportunity to file written exceptions 
thereto.
    4. The definition of producer.
    This partial recommended decision deals only with Issues 2 and 4. 
Issue 1 was discussed in the tentative partial final decision issued 
July 12, 1996 (61 FR 37628) and has been considered separately in a 
partial final decision. Issue 3 was discussed in the tentative partial 
final decision also, and is now moot.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof.

Material Issue #2--Deductions From the Minimum Uniform Price to 
Producers

    A proposal by Hunter Farms and Milkco, Inc., seeks to clarify the 
minimum payment to producers for Federal Milk Orders 1005, 1007, 1011, 
and 1046. Under the proposal, a handler (except a cooperative acting in 
its capacity as a handler pursuant to paragraph 9(b) or 9(c)) may not 
reduce its obligations to producers or cooperatives by permitting 
producers or cooperatives to provide services which are the 
responsibility of the handler. According to the proposal, such services 
include: (1) preparation of producer payroll; (2) conduct of screening 
tests of tanker loads of milk required by duly constituted regulatory 
authorities before milk may be transferred to the plant's holding tanks 
and any other tanker load tests required to establish the quantity and 
quality of milk received; and (3) any services for processing or 
marketing of raw milk or marketing of packaged milk by the handler. The 
proposal should be denied on the basis of this record.
    The Vice President of Hunter Farms, which operates plants regulated 
under Order 5 at High Point and Charlotte, North Carolina, testified 
that Hunter purchases milk from Piedmont Milk Sales, Carolina-Virginia 
Milk Producers Association (CVMPA), Mid-America Dairymen, Inc. (Mid-
Am), and Cooperative Milk Producers Association. The witness explained 
that CVMPA and Mid-Am are cooperative associations, while Piedmont Milk 
Sales is a marketing agent handling the milk of non-member producers.
    The witness testified that beginning in late 1994 and through the 
early fall of 1995, marketing conditions in the Southeast were so 
competitive among supply organizations that handlers were able to 
purchase raw milk from producers and cooperatives at Federal minimum 
order prices without any over-order premiums being charged. With the 
elimination of over-order premiums, he said, questions arose as to who 
must pay for services associated with the receipt of milk at regulated 
plants. He explained that when there were sufficient over-order 
premiums, it was assumed that the premiums included payment for the 
services associated with the receipt of milk at the plant. However, 
from December 1994 until September 1995, he said that competing 
handlers who received milk from cooperative associations at the minimum 
order price did not fully compensate the cooperatives for the services 
that were provided.
    The witness stated that when Hunter began purchasing milk from 
Piedmont at the minimum Federal order price, the market administrator 
of Order 5 took the position that they must also pay for the services 
that were provided by the dairy farmers marketing their milk through 
Piedmont and, therefore, issued underpayment notices to Hunter for milk 
received from Piedmont for the December 1994 through September 1995 
period. He said the market administrator refused to examine the issue 
of whether cooperative associations which provided similar services for 
competing handlers also should be compensated for those services.
    The witness pointed out that over-order premiums have now returned 
to Order 5, so the question of what constitutes a minimum payment to 
producers has become less urgent. He

[[Page 39472]]

emphasized, however, that the problem is capable of repetition since 
premiums in this area could be reduced or disappear entirely. 
Therefore, he said, it is important to resolve this issue before it 
arises again.
    The witness testified that without a change in the order, when 
prices paid are at Federal order minimums, handlers purchasing milk 
from non-member producers will be at a competitive disadvantage for the 
purchase of raw milk vis-a-vis their competitors who purchase from 
cooperatives. This will occur, he said, because the market 
administrator takes the position that cooperatives can provide free 
services for their customers but non-member producers serving competing 
handlers cannot provide the same services without charging over-order 
prices.
    Noting that the sale of packaged milk is extremely competitive, the 
Hunter representative testified that requiring one handler to pay more 
than another simply because the handler purchases milk from non-member 
producers results in immediate irreparable harm to the handler paying 
more for its milk because the handler will lose milk sales. He said 
that the current policy results in non-uniform prices paid by handlers 
in violation of the Agricultural Marketing Agreement Act. Not only is 
this result discriminatory and unfair, he said, it also leads to lower 
prices for all producers, members as well as non-members, because 
cooperatives tend to provide more, not fewer, services in competing for 
sales with non-members. Therefore, he concluded, cooperatives also 
would benefit from a clarification of the rules defining Federal 
minimum order prices.
    All of the orders involved in this proceeding should be amended to 
resolve this issue according to the Hunter Vice-President because 
Hunter and Milkco compete for raw milk procurement and sales of 
packaged products with handlers from each of the 4 orders. Moreover, he 
said, premiums returned to all 4 orders at the same time, which 
indicates that the cooperatives treat handlers in these 4 orders 
identically.
    A second witness representing Hunter Farms and Milkco, Inc., 
explained the proposal of these handlers in more detail. This witness, 
a consultant with a long history in Federal milk order regulation, 
explained that the proposal describes 3 categories of services.
    The first service described by the witness is the preparation of a 
producer payroll report. He said that the orders are fairly uniform as 
to the requirement for such reports, which show each producer's name 
and address, the total pounds of milk received from the producer, the 
average butterfat content of the milk, the price per hundredweight, the 
gross amount due, the amount and nature of any deductions, and the net 
amount paid.
    A second service described by the witness is the testing of 
incoming tanker loads of milk, as required by health regulations, to 
assure the milk meets minimum quality standards. The witness reasoned 
that if there is a legal requirement for this test to be performed, the 
cost of the test should be borne by the plant operator. He added that 
the order requires the plant operator to test and weigh the milk to 
establish the pounds of milk received and the butterfat content of the 
milk. The witness noted that in other parts of the country, these tests 
are handled differently. In the Indiana, Eastern Ohio-Western 
Pennsylvania, Southern Michigan, and Chicago Regional marketing areas, 
which provide for component pricing of milk, the market administrator 
has assumed the function of testing milk for butterfat and other 
components, and has increased the marketing service charges to non-
member producers from 5 to 7 cents to cover these services. He 
concluded that the market administrators in those areas obviously 
consider these tests to be a producer responsibility.
    The witness stated that there is a somewhat similar situation in 
Orders 5, 7, 11, and 46 because tests conducted by the market 
administrators are used to establish the amount of butterfat in milk 
receipts, which is a basis for payment to the producer. He said that 
the Department should address this inconsistency by determining whether 
these tests are the plant operator's responsibility or a producer's 
responsibility.
    The third service described by the witness includes any costs 
associated with processing raw milk or marketing milk in bulk or 
packaged form. The addition of this specific order language, he said, 
would support the historical position of the Department that the 
handler is responsible for the costs associated with the processing 
and/or marketing of all milk received.
    The witness stressed that the thrust of this proposal is to ensure 
equality in the cost of milk among regulated handlers. He said that 
current administrative practice in this area requires handlers 
receiving milk from non-member producers to absorb the cost of a 
variety of services which are provided at no extra charge to handlers 
receiving milk from cooperative associations. Thus, he concluded, these 
orders are not impacting uniformly on handlers who buy milk from 
cooperatives versus those handlers who buy from non-members, nor are 
they being uniformly applied to producers who are members of a 
cooperative versus those who are not members of a cooperative. By 
clearly defining what services are the responsibility of plant 
operators, regardless of the source of the milk received, this lack of 
uniformity can be corrected, he said.
    The General Manager of Carolina-Virginia Milk Producers Association 
or CVMPA offered qualified support for the Hunter-Milkco proposal. He 
said that from a philosophical point of view CVMPA would agree that if 
producers provide the services specified by the proponents--plus any 
additional services that are provided to a handler by a cooperative 
association--handlers should be charged the costs associated with these 
services. He said that, with these modifications, CVMPA could support 
the proposal.
    The witness stated that, to assure that cooperative members are not 
allowed to pay the cost of services given to handlers, the list of 
services in the Milkco-Hunter proposal should be expanded to cover 
tanker washing and tagging, supplying milk to handlers on an irregular 
delivery schedule, field work, disposing of surplus milk during months 
when the supply is above local needs, and importing supplemental milk 
for Class I use during periods of short production.
    While expressing the hope that market conditions do not return to 
the zero over-order prices that existed in 1994 and 1995, the CVMPA 
General Manager stated that the proposal, as modified by CVMPA's 
suggestions, could help decrease the likelihood that cooperative 
members would have to bear the costs resulting from these 
circumstances. He said CVMPA appreciated Milkco and Hunter Farm's 
attempt to address these circumstances.
    A spokesman for Milkco Inc. testified that Milkco, a fluid milk 
processing plant located in Asheville, North Carolina regulated under 
Order 5, receives milk from cooperative associations as well as 
independent producers marketing their milk through Piedmont Milk Sales. 
The witness testified in support of Hunter's position as it pertains to 
proposal number 2 and stated that Milkco received underpayment notices 
from the market administrator for the December 1994 through October 
1995 period on milk received from independent dairy farmers, but did 
not receive underpayment notices on milk received

[[Page 39473]]

under the same or similar conditions from cooperative associations.
    Testimony was also offered by a representative of Mid-America 
Dairymen, Inc. (Mid-Am) involving proposal number two. Mid-Am testified 
that it was not appropriate for proposal two to be heard under the same 
procedure as a hearing called to consider a proposal on marketwide 
service payments. Mid-Am also objected to the narrowness of Hunter-
Milkco's proposal. Mid-Am argued that the issue of minimum payments to 
producers is national in scope, and should not be limited to the 4 
Southeastern orders. This issue, Mid-Am suggests, should be addressed 
by the Secretary within the context of the Federal order reform as 
required by the 1996 Farm Bill on a national basis. In addition, the 
Mid-Am representative objected to such proposal on grounds of lack of 
notice to interested parties.
    The administrative law judge presiding over the hearing overruled 
Mid-Am's objection to hearing proposal number 2, noting that the 
Secretary had given interested parties the minimum 3-day notice 
requirement specified in 7 CFR 900.4(a). He also indicated that this 
proposal, unlike proposal number 1, was being considered on a non-
emergency basis and that, accordingly, interested parties had more than 
adequate time to brief it, discuss it, and consider it.
Briefs
    Briefs were submitted by interested parties both in support of and 
in opposition to this proposal. Proponents, Hunter Farms and Milkco, 
Inc., submitted a brief in support of their proposal, emphasizing the 
points made on the hearing record.
    Hunter and Milkco maintain that uniform applicability in the 
treatment of handlers is essential, and any lack of uniformity is in 
violation of the Agricultural Marketing Agreement Act, as amended. 
Referring to an earlier proceeding, In re: Kraftco Corp., which dealt 
with uniform applicability, proponents state that ``* * * all handlers 
must be treated identically with respect to receipt of services on 
their entire milk supply in the relevant marketing area.'' It is argued 
that issuance of underpayment notices only on that milk which was 
received from independent producers who contracted with a specific 
marketing agency does not promote uniformity and is discriminatory.
    Proponents addressed the issue of uniformity, not only among 
handlers, but also among producers. Hunter and Milkco state that 
independent producers may be subject to discriminatory treatment and 
lose their market as handlers find it cheaper to purchase milk from 
cooperatives that absorb costs which nonmembers cannot. In addition, it 
is argued that cooperative associations which provide services free of 
charge either believe ``* * * they were providing these services as 
additional services over and above that required by the Federal order, 
or they knowingly provided services to handlers which were the 
responsibility of handlers for free * * *''. The decision to perform 
such services at no charge must be taken into consideration when 
determining whose responsibility they are.
    Hunter and Milkco's brief also addresses the objections made by 
Mid-Am to this proposal. The handlers maintain that Mid-Am's objection 
to their proposal based on grounds of lack of notice is unfounded 
because the notice given was adequate. In addition, Hunter and Milkco 
argue that the suggestion by Mid-Am that this proposal be considered on 
a national basis is unjustified. Proponents maintain that the problem 
which has prompted this proposal is specific to the Federal order under 
consideration, and no evidence was presented to show that this problem 
exists in other regions of the United States.
    Fleming Companies, Inc., also filed a brief in support of this 
proposal. Fleming states that ``* * * To the extent such services 
primarily benefit producers, it is appropriate that producers be 
authorized to contract for such services, and to allow a deduction for 
the reasonable value of such services.''
    In addition, Fleming writes that as a buyer of milk from both 
independent producers as well as cooperative associations, it is 
concerned that without the clarification offered by the proposal, 
equity among member producers and non-member producers may be 
jeopardized. Fleming argues that price uniformity may not be maintained 
if cooperative associations are able to assume the cost of producer-
oriented services, but handlers receiving independent milk are not 
permitted to make a deduction for these services even if authorized by 
the producer.
    A brief filed by Mid-America Dairymen, Inc., emphasized the 
cooperative's strong opposition to the proposal. Mid-Am argues that the 
alleged underpayment problems, which the proponents believe will be 
resolved by such proposal, are not isolated to the Carolina Federal 
milk marketing order, and that such a problem could occur under any of 
the other Federal milk marketing orders in a situation when no over-
order charges exist. For this reason, Mid-Am believes that this issue 
should be considered on a national basis. Mid-Am also believes that 
with the resumption of over-order pricing within the Carolina order, 
there is no urgent need to adopt the proposed amendments.
    In addressing which services are the responsibility of handlers as 
opposed to those of producers, Mid-Am states that it is clear that the 
costs for butterfat testing are borne by all producers, and the costs 
of testing milk in tankers for antibiotics are borne by all handlers 
regardless of their source of supply. Mid-Am argues that no confusion 
exists as to who is responsible for these tests and, therefore, they 
should not be included in the proposed amendments.
    Mid-Am concludes its brief by reiterating its request that this 
issue be remanded to the Secretary for further consideration on a 
national basis. It suggests that this issue be evaluated under the 
current review of the Federal Milk Marketing Order system as required 
by the 1996 Farm Bill.
    The Kroger Co. states in its brief that proposal 2 is worthy of 
study and should be considered by the Secretary in the context of all 
Federal milk marketing orders. According to Kroger, any decision made 
on this issue should pertain to all Federal milk marketing orders. Like 
Mid-Am, Kroger suggests addressing this proposal within the context of 
the review of the Federal Milk Order Program as mandated by the 1996 
Farm Bill.
Conclusion
    Federal orders enforce the payment of minimum prices for milk to 
producers by handlers. Under orders, payment for milk received from 
producers may not be less than the uniform price as announced each 
month by the market administrator, except to producers who receive 
payment from their cooperative association. A cooperative association 
under the authorizing legislation may blend the net proceeds of its 
sales of milk for payment to its member producers. The enforcement of 
minimum prices for milk ensures that each producer receives a uniform 
proportion of the returns from higher valued fluid (Class I) milk sales 
as well as the lower returns from milk used in lower class uses.
    Payments to a producer by a handler, however, can be reduced to 
reflect ``proper deductions authorized in writing by such producer.'' 
Historically, such deductions from minimum milk prices of only two 
basic types have been permitted. The two types of deductions permitted 
are (1) payments that are

[[Page 39474]]

made by a handler on behalf of the producer to creditors of the 
producer, and (2) payments that are obligations of the producer in the 
production of milk and the transportation costs for delivery to the 
handler's plant. Such creditors for goods and services have included 
banks, other lenders, feed companies, veterinarians, machinery dealers, 
etc. Examples of payments associated with the production of milk and 
the delivery to the handler's plant would include feed, supplies, 
equipment and hauling. Handlers are not required to make payments to 
creditors on behalf of producers but are permitted to do so if the 
deductions are proper and authorized. Such permission recognizes that 
handlers frequently make payments to producer's creditors as a service 
to the producers. The term ``proper'' is included to prevent 
unwarranted deductions from minimum prices for milk.
    The authorization by a producer of a certain deduction may not be 
proper and thus disallowed by the market administrator. Producers 
cannot give up their rights to receive the uniform price by a deduction 
that is not of the two types described above.
    Additionally, under the 4 orders handlers are required to deduct 5 
to 7 cents per hundredweight from payment to independent producers for 
marketwide services which is paid to the market administrator. This 
marketwide service fee is used to provide market information and to 
check the accuracy of the testing and weighing of milk for producers 
who are not receiving such services from a cooperative association.
    The record of this hearing clearly points to a conceptual 
difference among market participants concerning what constitutes 
minimum prices to producers. To a large extent, this difference results 
from changing market conditions, new technologies, and order amendments 
reflecting these changes. The end result is that interpretations under 
various orders differ concerning the responsibilities of plant 
operators and the responsibilities of producers or their cooperative 
associations.
    Proponents would have the Secretary resolve this issue by 
delineating those services that are the responsibility of plant 
operators and those services that belong in the domain of producers. 
Furthermore, proponents apparently would have the Secretary determine a 
rate for each service so that if a producer or cooperative association 
provided the service for a plant operator, that plant operator could 
simply compensate the producer/cooperative according to the rate set 
forth in the order.
    One of the obvious problems in dealing with a proposal of this 
nature is to determine which services are, in fact, the responsibility 
of the handler and which are the responsibility of the cooperative 
association supplying milk to that handler. The record shows that the 
proponent handlers--Milkco and Hunter-- clearly have a different 
conception of their responsibility than does CVMPA, which agrees with 
them in principle but differs with them in specifics. While the 
proponents consider handler responsibilities to be payroll costs, 
screening of incoming milk, and all costs associated with marketing 
milk once it enters the plant, CVMPA maintains that those 
responsibilities should include tanker washing and tagging, ordering 
milk on an irregular delivery schedule, field work that is provided by 
the cooperative association, disposing of surplus milk during months 
when the supply is above local needs, and importing supplemental milk 
for Class I use during periods of short production.
    It is apparent that there is a significant difference of opinion 
concerning the services for which handlers should be responsible. 
Although evidence was not presented concerning the rates that should be 
associated with each of these services, there is no doubt that there 
would be clear differences of opinion in that area as well.
    It would be particularly difficult to establish uniform rates for 
the services suggested by CVMPA. For example, there was no indication 
of the cost of providing milk to a handler 4 times per week as opposed 
to 3 times per week. Similarly, there was no testimony or data 
concerning the cost of handling a market's surplus milk.
    The single issue prompting the Milkco-Hunter proposal was the 
alleged inequity between handlers buying cooperative association milk 
at minimum order prices--but with services provided by the 
cooperative--and handlers buying milk from non-members at minimum order 
prices but without the services that their competitors received with 
their cooperative-supplied milk.
    At the hearing, proponent's expert witness said that producers 
should have the right to market their milk through a marketing agent if 
they so choose. Setting aside the question of the legality of marketing 
agents under the Sherman Antitrust Act, if a producer contracts with an 
agent to market his/her milk, some means must be devised to pay that 
agent for the services provided. This raises the question of whether 
deductions to the marketing agent authorized in writing by the producer 
are ``proper'' deductions under the order.
    Assuming there is no legal obstacle to the use of a marketing 
agent, the marketing agent presumably would be the party responsible 
for selling the producer's milk to a handler and might collect the 
payment from the handler on behalf of the producer, if the producer has 
provided this authorization to the marketing agent. In such a case, 
another question that must be clarified is whether a handler's payment 
of the minimum order price to a producer's marketing agent should be 
deemed to be a payment of the minimum order price to the producer, just 
as it is in the case of a cooperative association.
    At the hearing, proponent's expert witness was questioned about the 
desirability of simply treating all deductions authorized in writing by 
a producer as ``proper'' deductions. The witness indicated that there 
have been cases in the past where producers have been coerced--for fear 
of losing their market--into authorizing deductions that were not 
proper deductions, as determined by the market administrator. To the 
extent that this exists, the witness said, the Secretary would not be 
enforcing minimum uniform prices to handlers.
    Provisions dealing with the minimum payment that handlers are 
required to pay producers are at the core of each milk order. They 
should be based upon the same policy considerations and should not 
differ from one order to another. Therefore, we concur with the 
suggestions made by The Kroger Company and Mid-America Dairymen, Inc., 
to consider this important issue as part of the Federal order reform.
    The record of this hearing demonstrates a clear disagreement among 
market participants concerning the division of services between 
producers and handlers. In view of this disagreement, the importance of 
this issue to the program, the current review of all Federal order 
provisions in connection with the 1996 Farm Bill, and the lack of a 
present problem in these four orders, the proposal of Hunter/Milkco 
should be denied. However, the terms of the proposal, the briefs 
dealing with the proposal, the relevant transcript and exhibits from 
the hearing, and this recommended decision should be considered in 
conjunction with the reform of Federal milk orders mandated by the 
Federal Agriculture Improvement and Reform Act of 1996.
    The 1996 Act requires the Secretary of Agriculture to merge the 
existing 33 Federal milk orders (currently 32 orders) into no more than 
14, and no less than 10, milk orders by April 1,

[[Page 39475]]

1999. As part of this process, the Department is undertaking a complete 
review of all of the provisions in Federal milk orders in an effort to 
determine which provisions would best meet the needs of the 
consolidated orders in the next century. This review provides an ideal 
opportunity to study this important issue. It will incorporate the 
views and experiences of many different market administrator offices 
and it will solicit the views of interested parties to comment on the 
provisions that are recommended for the newly consolidated orders.
    As pointed out by Hunter and Milkco in their brief, the 
underpayment problem which they experienced has been rendered moot with 
the return of over-order premiums. Although these premiums could again 
disappear, bringing the uniform pricing issue to the fore once again, 
this is not likely to happen in the near future. Nevertheless, if this 
should happen, proponents could request relief through other means 
pending final resolution of this matter.

Material Issue #4--Definition of Producer

    A proposal to modify the definition of producer for Federal Milk 
Orders 1005, 1007, 1011, and 1046 should also be denied on the basis of 
the testimony and evidence received at the reopened hearing.
    The spokesman for Mid-America Dairymen, Inc. (Mid-Am), Carolina-
Virginia Milk Producers Association (CVMPA), and Maryland-Virginia Milk 
Producers Association, proponents of the proposal to modify the current 
producer definition, testified that the elimination of the base-excess 
plans for each of the orders will allow for the pooling of milk not 
historically associated with these markets. Mid-AM's proposal to 
further define producer qualification, he stated, aims at minimizing 
this exposure, which would be detrimental to Southeastern dairy 
farmers.
    The spokesman offered testimony explaining that base-excess plans 
(included in each of the 4 orders at the time of the reopened hearing, 
but terminated from each order effective January 1, 1997, as a result 
of the expiration of legislative authority to include such plans in 
Federal milk orders) have substantially removed the incentive for a 
dairy farmer who was associated with another market during the base-
building months to become a producer under one of these 4 orders during 
the base-paying months. He expressed concern that with the elimination 
of such plans, no provisions would exist to prevent a dairy farmer from 
pooling any milk diverted or delivered within limits to pool plants 
under the orders during the former base-paying months.
    After explaining the current provisions regarding the definition of 
producer, the spokesman testified that Mid-Am's proposal is almost 
identical to Order 46's current provision applicable to producers 
supplying a country plant, which excludes a person with respect to any 
milk produced by him or her that is received or diverted from a country 
plant in any month of March through August, unless at least 60 days' 
production from such farm was producer milk during the preceding 
September through February period.
    The witness stated that the proposed provisions for the 4 orders 
will exclude from the producer definition, during the flush production 
months of February through May, any dairy farmer who delivered more 
than 40 percent of his or her milk to plants as other than ``producer 
milk'' during the months of August through November. The proposed 
provisions, according to the witness, are designed to restrict those 
producers not normally associated with such orders from pooling their 
milk during the flush production months when it is not needed to supply 
fluid needs if they have not pooled such milk during the prior short 
months when supplies were needed.
    In addition, the spokesman stated that for the purpose of 
determining the percentage of a producer's milk that was pooled during 
the prior August through November period, deliveries to plants as 
producer milk under the 4 orders should be considered deliveries under 
the applicable order. He testified that this proviso is necessary to 
accommodate: (1) the historical shifting of producers between the 4 
orders; (2) the shifting of pool distributing plants; and (3) the 
shifting of producer milk due to the opening and closing of pool plants 
in the 4-order area.
    The witness also testified that the proposal, as found in the 
notice of hearing, should be modified to include a new subparagraph in 
Section 44 of the orders which is necessary to define the 
classification of the milk received. Also, the witness added that there 
is a revision to Section 60 involving the pricing of the milk as 
classified in Section 44. This addition to order language, according to 
the spokesman, would require the receiving handler to pay into the pool 
the difference between the Class I price and the Class III price.
    When asked about administrative costs associated with the relevant 
proposal, the witness contended that there should be no noticeable 
difference between costs associated with the producer qualification 
proposal and costs associated with the base-excess plan. In conclusion, 
Mid-Am's spokesman testified that the adoption of such proposal is 
necessary to foster orderly marketing in the area and protect producer 
pools of the 4 southeastern orders.
    A representative of CVMPA testified that CVMPA fully supports the 
producer qualification proposal to make sure that high Class I 
utilization markets in the Southeast do not carry surplus from other 
surrounding markets resulting in low Class I utilization rates during 
the flush months of production. He maintained that the proposal 
benefits producers, processors, and consumers by maintaining fluid 
supplies, while encouraging the survival of local producers.
    A representative from Associated Milk Producers, Inc. (AMPI), 
Southern Region, a cooperative association representing over 2,500 
dairy farmers in the South and Southwest, testified in opposition to 
Mid-Am's proposal to modify the producer definition of the 4 orders. 
The witness also maintained that such proposal is not related to the 
issue of transportation credits, and should, therefore, not be included 
in the reopened hearing.
    According to the spokesman, the current producer pooling 
requirements under Order 7 are more restrictive than the proposed 
producer qualification requirements; thus, the proposal actually 
constructs an additional layer of unnecessary pooling requirements. The 
witness claimed that no handlers are currently abusing the order by 
diverting the maximum amount allowable under the provisions of Order 7; 
otherwise, he argued, such a high percentage of Class I utilization 
would not be maintained.
    AMPI's witness also testified that it is apparent that the 
proponents intend to replace the base-excess plans in the 4 orders. 
However, such an alternative is not viable, he argued, because 
sufficient protection for local producers already exists. While 
acknowledging the existence of such ``dairy farmers for other market'' 
provisions in other Federal orders, the spokesman testified that the 
Southeast markets will not benefit from such a provision. If the 
proposal is nevertheless adopted, he said, AMPI recommends a 
modification to the proposal such that milk imported from outside the 
marketing area that is received at a fully or partially regulated plant 
during any month of the year must be allocated to Class I and the 
handler of origin must be compensated at the receiving plant's Class I 
price.

[[Page 39476]]

    A second representative from AMPI also testified regarding Mid-AM's 
proposal to incorporate a ``dairy farmer for other markets'' provision 
in the 4 orders. She stated that administration of such a provision 
would create additional costs and place a more serious burden on the 
cooperative. According to the witness, additional time and resources 
would be necessary to adapt AMPI's procedures to the new provision, 
including greater technical and manual assistance.
    A representative of Piedmont Milk Sales testified that Piedmont 
supports the concept that a producer must make his milk available to 
the Class I market when it is needed in the fall or short period in 
order to be allowed to pool his milk in the same market during the 
spring or flush months. He contended that such a limitation assures 
that the producer who receives the blend price enhanced by the Class I 
value in those markets has actually earned it.
    A spokesman for Fleming Dairy, which operates pool distributing 
plants in Nashville, Tennessee, and Baker, Louisiana, testified in 
support of Mid-Am's proposal, but suggested that the producer 
qualification period should be July through November, rather than 
August through November.
    Additionally, a representative of Barber Pure Milk Co., a pool 
plant operator in Birmingham, Alabama, and Dairy Fresh Corporation, a 
pool plant operator in Greensboro, Alabama, testified in support of 
Mid-AM's producer qualification proposal. He suggested that any milk 
which is delivered directly from the farm and is received at a pool 
plant should qualify as producer milk, but any milk which is diverted 
should not.
    Briefs. Select Milk Producers submitted a brief in opposition to 
the proposed changes in the producer definition. According to Select, a 
similar proposal was introduced during the Southeast merger proceedings 
and was subsequently denied due to the lack of justification for such a 
provision. Select's brief indicated that the pooling standards and 
diversion limitations provided in the orders give the market 
administrator enough flexibility to prevent distant milk from being 
associated with the 4 markets; therefore, a ``dairy farmer for other 
markets'' provision is not needed in these orders.
    A brief filed on behalf of AMPI argued that the ``dairy farmer for 
other markets'' proposal submitted by Mid-Am and CVMPA and heard at the 
reopened hearing was in violation of the rules of practice and 
procedure governing the proceedings of marketing agreements and orders. 
AMPI maintains that this proposal does not qualify as an issue related 
to transportation credits, and therefore, should not have been 
discussed at the reopened hearing. Additionally, AMPI argued that the 
hearing record lacks the necessary evidence that would support adoption 
of such proposal. While reiterating its opposition to the additional 
work associated with implementation of the proposal as testified to at 
the reopened hearing, AMPI's brief also opposed the notion that in Mid-
Am and CVMPA's proposal determination of a producer's eligibility would 
not only be dependent upon the amount of milk pooled under the order in 
which the producer is seeking producer status, but also upon the volume 
of milk pooled by that producer for the subject months in all 4 of the 
orders. According to AMPI, there is no justification or evidence which 
supports the proposed ``dairy farmer for other markets'' provision.
    CVMPA, one of the proponents of the producer qualification 
proposal, filed a brief in support of its proposal reiterating the 
arguments presented during the reopened hearing. In its brief, CVMPA 
pointed out that its proposal would not create a barrier to entry into 
these markets as was testified to by a representative of AMPI. CVMPA 
argued that such a proposal would actually encourage milk to be pooled 
when local supplies are inadequate to meet Class I needs. While 
acknowledging that diversion limitations and producer touch-base 
provisions currently in effect under the subject orders do provide 
limited Class I utilization protection for the markets, CVMPA argued 
that these limitations are insufficient to protect producers who have 
pooled their milk during the fall months from being displaced by 
producers entering those markets during the spring flush months in 
order to take advantage of the high Class I utilization percentages 
reflected in the high blend prices of these southeastern markets.
    CVMPA also addressed the argument made by AMPI that the proposal 
would create an additional administrative burden for both the market 
administrators' offices and reporting handlers. According to CVMPA, no 
additional work would be created by the proposal, and the 
administration of the proposed provision would be easier than that 
associated with the former base-paying plans. CVMPA also expanded the 
proposal to allow a producer to qualify as a producer in the spring if 
his/her farm had not delivered Grade A milk from such farm during the 
previous August through November period. Furthermore, CVMPA stated that 
the producer's eligibility should be based upon the proportion of Grade 
A milk delivered from the farm in the previous fall in order to prevent 
a producer who is converting from Grade B to Grade A or a producer who 
lost his/her Grade A permit from being penalized.
    A brief was also filed by Mid-Am in support of the proposal to 
modify the producer definition. In addition to reiterating the 
arguments testified to during the reopened hearing, Mid-Am's brief 
stated that the proposed producer qualification provisions are 
necessary to foster orderly marketing in the area and also to protect 
the producer pools of the 4 orders. In its brief, Mid-Am also contends 
that the only opposition to the proposal testified to during the 
hearing was made by AMPI, which would be prevented from rotating their 
producers' milk in order to receive transportation credits. Mid-Am 
requests that the proposed provisions be implemented at the earliest 
possible date.
    Conclusion. The record of the reopened hearing does not clearly 
demonstrate the need to amend the producer definition of Orders 5, 7, 
11, and 46. Current safeguards exist to ensure that sufficient supplies 
of milk are made available for fluid use without the unwarranted 
pooling of additional supplies of milk that are not associated with 
serving the fluid market.
    Proponents of this proposal believe that the termination of 
seasonal base plans will create disorderly marketing conditions in the 
4 orders. However, the testimony and evidence received at the December 
17-18, 1996, hearing do not sufficiently support this argument. 
According to the proponents, the termination of seasonal base plans, 
effective January 1, 1997, removes the incentive for producers to pool 
their milk during the short months when milk is needed in the Southeast 
because they will no longer receive the higher base prices for their 
milk during the following flush months. While it is feared by the 
proponents that the termination will open up the 4 Southeast markets to 
those producers not normally associated with such markets, but who seek 
to take advantage of the high Class I utilization rates, the record was 
unconvincing in its need for modification of the producer definition 
for this reason.
    It is apparent that the proposal was initiated in response to the 
elimination of seasonal base plans in Federal milk orders. In other 
words, the proposed modification of the producer definition is intended 
to fill the void left by the removal of the base-excess plans. However, 
changing the producer definition should not be compared to

[[Page 39477]]

the incorporation of base plans in the orders. Base plans are 
instituted in order to level out production throughout the year so that 
adequate milk supplies are ensured during the short production months, 
while discouraging surplus supplies in the flush production months. The 
base plans also did have the effect of preventing producers not 
normally associated with a market from entering such market during the 
flush production months because they would have received the low, 
excess price for their milk. Nevertheless, the removal of base plans 
does not by itself necessitate amending the orders.
    The orders currently have strict pooling requirements. For example, 
as was testified to at the reopened hearing by AMPI's spokesman, the 
pooling requirements for Order 7 specify that a producer's milk must be 
received at least 4 days at a pool plant to be eligible to be pooled 
during the months of December through June. Additionally, there is a 50 
percent diversion limitation in Order 7 to nonpool plants for those 
same months. The Carolina and Tennessee Valley orders also have 
diversion limitations for cooperative associations during most months 
of 25 percent of the total quantity of producer milk. They also 
maintain pooling requirements specifying how many days a month producer 
milk must be received at pool plants. The Louisville-Lexington-
Evansville order specifies a diversion limitation based upon the number 
of days that a producer's milk is diverted during a month. The evidence 
in this proceeding is insufficient to conclude that the current pooling 
standards will not recognize the seasonally varying needs for milk for 
fluid use. The creation of additional producer pooling standards is 
unnecessary and unwarranted on the basis of the record herein and, 
therefore, the proposal should be denied.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions set forth herein, the 
requests to make such findings or reach such conclusions are denied for 
the reasons previously stated in this decision.

    Dated: July 17, 1997.
Lon Hatamiya,
Administrator, Agricultural Marketing Service.
[FR Doc. 97-19370 Filed 7-22-97; 8:45 am]
BILLING CODE 3410-02-P